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JPMorgan Credibility Cut With Fitch Downgrade

Written by: Shanthi Bharatwaj,Antoine Gara05/11/12 - 5:38 PM EDT

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JPM

NEW YORK ( TheStreet) -- Fitch Ratings has cut JPMorgan Chase's (JPM) long term-debt rating by one notch to A+ from AA- as the nation's largest bank continues to reel from a $2 billion trading loss it disclosed late on Thursday.

The ratings cut caps a dramatic 24 hours after the trading loss was unveiled, which has humbled the bank's chief executive Jamie Dimon, one of Wall Street's most credible advocates, and reignited calls for financial industry reform. Fitch's move adds to mounting negative developments for JPMorgan that include reports of regulatory inquiries, analyst downgrades and lingering uncertainty over the magnitude of its trading loss.

JPMorgan Chase CEO Jamie Dimon

JPMorgan CEO James Dimon's announcement of a $2 billion trading loss just under 45 days into the second-quarter pushed the company's shares down over 9% in Friday trading, to a closing price of $36.96. Shares fell slightly in after-hours trading on Fitch's ratings cut.

JPMorgan's ratings cut and its tumbling shares come after the bank disclosured a trading loss to its synthetic credit positions in its Chief Investment Office. Those positions were intended to hedge JPM's overall credit exposure during periods of credit stress; however, CEO Dimon said they were poorly executed.

"Fitch views the size of loss as manageable. That said, the magnitude of the loss and ongoing nature of these positions implies a lack of liquidity. It also raises questions regarding JPM's risk appetite, risk management framework, practices and oversight; all key credit factors. Fitch believes the potential reputational risk and risk governance issues raised at JPM are no longer consistent with an 'AA-' rating," said the agency in its cut.

The agency also said it would keep JPMorgan's ratings on a negative watch, citing an expected lingering volatility of earnings that CEO Dimon said could lead to a further loss of $1 billion.In its Thursday filing, JPMorgan said a key risk measurement, value-at-risk, changed in first-quarter 2012, leading to a spike in the amount that the bank says it could lose on any given trading day. "This resulted in a near doubling of VaR to $170 million... Fitch believes this also highlights some problems with modeling related to this portfolio," said the agency in its assessment.

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Fitch noted that at A+, JPMorgan's ratings reflect "its dominant domestic franchise as well as its solid and growing international franchise in investment banking and commercial banking," in addition to a strong capital base that puts it ahead of most peers and in accordance with Basel III standards.

In an unscheduled conference call on Thusday, CEO Dimon revealed that the bank's $2 billion trading loss in its synthetic credit portfolio, offset by a $1 billion securities gain, as a strategy to re-hedge the bank's overall credit risk backfired. Dimon described the trades as "flawed, poorly reviewed, poorly executed" and reflected "sloppiness" and " bad judgment."